7 answers to your questions about Aditya Birla-Grasim merger

Company financials are not always simple to understand. This problem compounds when you talk about mergers and acquisitions. You have to calculate how many shares you get as an investor, and what the finances of the new company will be like. Only then can you move on to the most important question: Does it benefit you as an investor.

This applies to investors holding shares of Aditya Birla Nuvo (ABN) or Grasim. The two conglomerates recently announced a merger that has given rise to more questions than answers.

Here we attempt to answer some of your key questions:

How many shares will I get?

As an investor, your first concern is how your shareholding changes. If you hold ABN shares, you will receive 3 Grasim shares for every 10 shares you hold. This is the first step of the plan – merge the two companies to create a single group of companies. Kumar Mangalam Birla referred this entity as ‘New Grasim’. This group will hold companies working in retail, telecom, financial services, cement, and chemicals industries.

What about the financial services company?

Once the initial merger is complete, the new group would demerge its financial services arm – Aditya Birla Financial Services (ABFS). Its shares would be listed separately on the stock exchange. Demergers usually unlock value. We explained this in one of our previous Meaningful Minutes. You can read it here[SK1] . Once the Financial services company gets listed separately, existing shareholders of the merged company get allotted 7 shares of the newly listed ABFS.

What happened to share prices?

Shareholders did not take the merger announcement well. The price of ABN shares fell as much as 25% post the announcement. Shares in Grasim did not fell as much. However, they corrected by 10% before the announcement when the merger rumors started. One reason for this could be that the numbers don’t tally. The merger equals 10 shares of ABN with 3 shares of Grasim. However, 10 shares of ABN cost Rs 12,880, while 3 Grasim shares are worth Rs 13,602.

What worries investors?

There are two key factors. They are connected to ABFS and Idea Cellular. Aditya Birla Nuvo had planned to demerge the financial services arm, which is one of the fastest growing Non-Banking Financial Company (NBFC) in the country. Shareholders were looking forward to the listing as it increases the value of the shares. Now, however, current ABN investors have to share the bounty with the Grasim shareholders.

What’s with Idea Cellular?

Many analysts and investors consider that the merger was planned to help Idea Cellular, ABN’s telecom business. Currently, the telecom industry is bracing for a 4G revolution. Most of the players, however, are wary of Reliance Jio’s entry in the sector. The new player comes with it the power and backing of the largest company in India—Reliance Industries. To compete with this, Idea would need to invest crores of rupees. By merging the two companies, Idea stands to benefit as it can borrow more money. Alternatively, it could also get funding from its parent company. Investors usually worry about high debt. However, Kumar Mangalam Birla denied that the New Grasim would fund Idea Cellular.

Why do investors avoid big conglomerates?

Another reason investors worry is that the new company will just be a group of businesses—it does not have a business of its own. This means it solely relies on dividends from the companies it holds for income. So holding the shares of the merged entity is equivalent to holding shares of all the individual companies. Investors, however, may not prefer all businesses. So, they would rather invest in the holding companies of their choice. This way, they can avoid the complicated revenue streams and debt holding of multiple businesses

Are there any benefits of the merger?

Yes. Many investors prefer big conglomerates. This is because the financial backing of a parent company often helps businesses succeed. Otherwise, they may have failed from lack of funding. Moreover, most of the industries that ABN and Grasim are exposed to are fast-growing sectors, according to Dilip Gaur, managing director of Grasim. Plus, some of these are strong businesses with a steady cash flow. This can benefit the whole group of companies—and thus, shareholders.

Grasim is 'firepower' to grow financial services business faster: Birla Read more

Rs 37,658 crore

Idea Cellular has debt outstanding worth Rs 37,658 crore. Since ABN holds 23.3% stake in Idea, it is responsible for that much debt too. This amounts to Rs 8,736 crore. This will be added Grasim’s books after the merger.

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